Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that CI Resources Limited (ASX:CII) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for CI Resources

How Much Debt Does CI Resources Carry?

As you can see below, CI Resources had AU$14.7m of debt at June 2021, down from AU$18.7m a year prior. However, its balance sheet shows it holds AU$44.6m in cash, so it actually has AU$29.9m net cash.

How Strong Is CI Resources' Balance Sheet?

We can see from the most recent balance sheet that CI Resources had liabilities of AU$25.5m falling due within a year, and liabilities of AU$33.8m due beyond that. Offsetting this, it had AU$44.6m in cash and AU$38.0m in receivables that were due within 12 months. So it actually has AU$23.3m more liquid assets than total liabilities.

This surplus suggests that CI Resources has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, CI Resources boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, CI Resources grew its EBIT by 122% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is CI Resources's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While CI Resources has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, CI Resources recorded free cash flow of 33% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that CI Resources has net cash of AU$29.9m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 122% over the last year. So is CI Resources's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - CI Resources has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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